New Classical Theory

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New Classical Theory

During the 1980s, mainstream economic
theory rejected Keynesianism and returned to its Classical market roots,
with its emphasis on market freedom and a limited role for the state.
Both the IMF and World Bank quickly began to adopt this New-classical
perspective.

Three different New-classical approaches
emerged;

The free-market
approach, where markets alone are assumed to be sufficient to generate maximum
welfare.

The public-choice approach, which is an extreme
New-classical model which emphasises that all government is ‘bad’ and
leads to corruption and the gradual confiscation of private property.

The market-friendly approach, which suggests that,
while markets work, they sometimes fail to emerge, and a government has an
important
role in compensating for three main market failures: missing markets,
imperfect knowledge and externalities.

New-classical theorists rejected the Keynesian
view which dominated the 1970s. Despite differences of emphasis, they
have tended to agree that development is best left to markets. In particular,
New-classical economists believe that, to develop, countries must
liberate their markets, encourage entrepreneurship (risk taking),
privatise state owned industries, and reform labour markets, such as
by reducing the powers of trade unions.

Trade liberalisation

There is a broad
consensus between New-classical economists that
free trade can help stimulate growth and development by encouraging
inward investment and the application of economies of scale and
economies of scope, increasing competition and breaking down domestic
monopolies and creating a low inflation environment.